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1 October 2014 saw the first set of price reductions under the new, further accelerated, Simplified Price Disclosure arrangements. Price reductions applied to 442 forms and strengths of 82 drugs and ranged between 10% and 62%.

As a result of these price reductions, pharmaceutical manufacturers, wholesalers and pharmacies have contributed more than $400 million in annual savings to taxpayers.

Figure 1: Impact of 1 October 2014 Price Disclosure reductions by ATC Group

$1 billion in cuts in the last 12 months

The four sets of price disclosure reductions over the last 12 months (1 December 2013, 1 April 2014, 1 August 2014 and 1 October 2014) have reduced annual funding on affected drugs by approximately $1 billion. This is on top of the significant savings provided in earlier rounds.

PBS costing less for taxpayers

Government spending on the PBS per head of population has continued the decline that started with the inception of Expanded and Accelerated Price Disclosure in April 2012. Out-of-pocket costs have also declined as a result of price disclosure and more drugs being priced below the general co-payment level.

Data Sources: PBS Date of Supply data published on pbs.gov.au, and population estimates from the Australian Bureau of Statistics. Date of Supply data is the only data that provides a reliable comparison over time. Date of Supply data is updated each month however the data used here was accessed in October 2014 and should be subject to only minor future revision.

Parliamentary Budget Office (PBO) Confirms Sustainability of the PBS

The Parliamentary Budget Office’s Projections of Government spending over the medium term confirmed that the PBS not only had grown slower than GDP historically but predicted that it would represent a “negligible” share of government expenditure growth over the medium term (see PBO chart below). It is now time that the consequences of sustained reductions in PBS prices, and the low growth outlook, are properly addressed. All components of the PBS – pharmacies, wholesalers and manufacturers – are under increasing pressure. Now is the time to provide certainty for the industry and for the patients that are so well served by the PBS.

Price disclosure has generated massive savings and the PBS has been shown to be on a sustainable path. A commitment to further timely investment in cost effective new medicines, viable remuneration arrangements for pharmacist dispensing and professional services, and appropriate funding for wholesaling of PBS medicines, are now urgently required. To provide an environment that encourages investment, the sector also requires stability and predictability. Further changes to price disclosure would deter investment and more jobs would be lost. Changes are unnecessary and should not be contemplated.

This year’s budget revealed that the PBS will cost $4.5 billion
less from 2013-14 to 2016-17 than was expected in last year’s
budget. $0.7 billion of that was attributed to increases in
co-payments and safety net thresholds to be introduced from
January 2015. However the remaining $3.8 billion is simply
windfall benefit from existing reform and lower than expected
growth. This is on top of a total of $4.1 billion in forward
estimate downgrades across the previous two budgets.

The amount taken out of the PBS forward estimates over the
next three financial years had a larger positive impact on the
budget bottom line over that period than any savings measure
in the 2014 Budget. The PBS continues to do more than its
share of fiscal “heavy lifting”.

As shown below, these latest forward estimates show that PBS
expenditure as a percentage of Gross Domestic Product (GDP)
is expected to decline to less than 0.62% by 2017-18.

Figure 2 – Savings from PBS Reforms top $2 billion per year

The 2014-15 Health Portfolio Budget Statements included a
new table showing all ongoing savings from PBS Reforms. Next
financial year the savings will be running at more than $2 billion
per year. Two years later they will have increased to more than
$2.5 billion per year and cumulatively they will deliver $9.9
billion over the next four years.

Clearly, PBS Reforms are delivering massive savings. With those
savings come significant—and growing—impacts on all parts
of the pharmaceutical industry—manufacturers, the supply
chain and community pharmacies.

Figure 3 – PBS expenditure is growing slower than other major areas of the health budget

The Budget papers show that expenditure on the PBS will decline significantly in 2014-15, followed by further declines in each of the out years. This is despite significant savings measures in other areas of the health budget such as the MBS.

Figure 4 – How will PBS co-payment and Safety Net changes affect the PBS in 2015?

The Budget papers show that expenditure on the PBS will
decline significantly in 2014-15, followed by further declines
in each of the out years. This is despite significant savings
measures in other areas of the health budget such as the MBS.
It was announced in the Budget that PBS co-payments will
increase by 13% on 1 January 2015, over and above the usual
CPI increase – an increase of $0.80 per prescription for patients
with a concession card and of $5.00 per prescription for those
without a concession card. Of at least equal significance,
especially in the longer term, were progressive increases to
safety net thresholds. The concessional threshold will reach 68
co-payments by 2018, while the general safety net will increase
at 10% above inflation each year for four years, and will be well
over $2,000 by 2018.

The most recent major increase in co-payments was a 24%
increase to both co-payments effective from 1 January 2005.
A major study by the University of Western Australia found
that, compared with dispensings prior to the co-payment
increase, prescriptions fell by 8% for combination asthma
medicines, 9% for proton pump inhibitors and 5% for statins.
The study concluded that increases in patient contributions
particularly impact on concessional patients’ ability to afford
medicines. The increase in the co-payment in 2014 will be
somewhat smaller than in 2005 and the reductions in filled
prescriptions are likely to also be smaller. However the
introduction of a GP co-payment from 1 July 2015 may also
impact on the number of prescriptions written.

As shown below, following the 2005 co-payment increases, PBS
prescription volumes decreased in the two subsequent years.

In the last few months, major reports from three separate parts of government have confirmed that PBS expenditure is now decreasing and that price disclosure is delivering savings far in excess of what was expected.

No further PBS savings measures are required or justified. What is needed now is for part of the ongoing savings provided through price disclosure to be reinvested in the PBS. This will ensure patients continue to have access to new and innovative treatments and that the PBS can continue to be implemented efficiently and safely through aviable supply chain and community pharmacy network.

Exhibit 1 – Department of Health (November 2013)

The 2012-13 Department of Health & Ageing Annual Report confirmed that Commonwealth pharmaceutical expenditure fell by an unprecedented $820 million (8.5%) in just one year …

Exhibit 2 – The Treasury (December 2013)

The 2013-14 Mid-Year Economic & Fiscal Outlook yet again listed the PBS as the largest single downward revision across the entire Commonwealth Budget …

This MYEFO outcome was just the latest in a series of reductions to PBS forward estimates. These reductions have amounted to $8.9 billion since the 2011-12 Budget, with expenditure as a percentage of GDP now expected to fall in each of the next three financial years.

Exhibit 3 – The Productivity Commission (January 2014)

In January the Productivity Commission’s Report on Government Services 2014 found that PBS pharmaceuticals had the slowest growth in prices across all areas of health expenditure – an average annual inflation of just 0.2% over nine years to 2011-12.

In last year’s Budget the expectation of expenditure on pharmaceutical benefits was reduced by $1.6 billion over four years. This year’s Budget has gone even further – downgrading estimates by an additional $2.5 billion over four years. None of this has come from new savings measures. All of the savings from Expanded and Accelerated Price Disclosure and the Fifth Community Pharmacy Agreement (combined, a total saving of $2.5 billion over five years), were already factored in to the 2010 Budget. The additional $4 billion downgrade over the last two budgets is simply the result of Treasury having previously underestimated the impact of PBS Reforms and overestimated the demand for medicines.

The latest forward estimates also show that PBS expenditure as a percentage of Gross Domestic Product (GDP) is expected to decline in each of the next four years.

Figure 2 – PBS expenditure is growing slower than other major areas of the health budget

The Budget states that total Health expenditure is estimated to increase by a total of 8.6% in real terms through to 2016-17, driven by a growing and ageing population. However, the PBS expenditure component of this budget is estimated to grow by a much lower rate of only 5%. In contrast, expenditure for Public Hospitals is set to increase rapidly by 17% in real terms.

Public Hospitals and Medical Services make up more than two thirds of total health expenditure, with a total cost over the forward estimates of $186 million compared to $47 billion for the PBS. It is worth noting that the total growth in annual expenditure on Public Hospitals and Medical Services over the next four years ($10 billion) is equivalent to the total amount currently spent on PBS medicines in one year.

Figure 3 – Price Disclosure in action

Through until April 2013 reductions in the price of PBS medicines as a result of Price Disclosure have applied to 130 drugs. The impact of these price reductions is depicted below. A further 39 price reduction will apply on 1 August 2013. Every off-patent drug is subject to Price Disclosure, ensuring that taxpayers reap the benefit of the highly competitive market for these drugs.

Figure 4 – Low growth in out-of-pocket costs for medicines

Figure 4 uses data from the Australian Bureau of Statistics to look at the growth in the price consumers pay for medicines compared with the growth in overall inflation and household incomes. The data shows that over the last two decades between June 1991 and June 2012, consumer medicine prices have grown by 57%. This might sound large, however, this compares with overall prices in the economy growing by 70% over the same period. This means that the prices consumers pay for their medicines has been lower than inflation over the last 20 years.

Interestingly, median household income has grown by 118% over the same period, meaning that over the last 20 years household incomes have grown at more than double the rate of medicine prices. This compares with other areas of household expenditure which have grown at more than the rate of general inflation and household income, such as the prices for utilities and petrol.

Over the same 20 year period the prices consumers pay for medical and hospital services have increased by 191%, or more than three times the rate that medicine prices have grown, and faster than household incomes have grown over the same period. So while certainly consumers may be feeling the pressure of higher prices for health costs, this has not been due to medicine prices.

Figure 1 shows Medicare Australia data which shows PBS expenditure growth at 6% per annum in nominal terms in the twelve months to September. This growth has been driven by growth in the volume of prescriptions at 4.8% over the same period. It is highly likely that this growth rate has been heavily skewed by Medicare Australia continuing to process
prescriptions in a particular month, in this case the month of September. September 2012 had unusually high monthly expenditure (around $300m higher than September last year) and prescriptions (almost 7 million prescriptions higher than September last year).

Figure 2 uses data from the Australian Bureau of Statistics to look at the growth in the price consumers pay for medicines compared with the growth in overall inflation and household incomes. The data shows that over the last two decades between June 1991 and June 2012, consumer medicine prices have grown by 57%. This might sound large, however, this compares with overall prices in the economy growing by 70% over the same period. This means that the prices consumers pay for their medicines has not kept pace with inflation over the last 20 years.

Interestingly, median household income has grown by 118% over the same period, meaning that over the last 20 years household incomes have grown at more than double the rate of medicine prices. This compares with other areas of household expenditure which have grown at more than the rate of general inflation and household income, such as the prices for utilities and petrol.

Over the same 20 year period the prices consumers pay for medical and hospital services have increased by 191%, or more than three times the rate that medicine prices have grown, and faster than household incomes have grown over the same period. So while certainly consumers may be feeling the pressure of higher prices for health costs, this has not been due to medicine prices.

Source:PBS expenditure-DoHA Annual Reports, Department of Health and Ageing, Various Years. GDP-Australian Bureau of Statistics, catalogue 5206.0 – Australian National Accounts: National Income, Expenditure and Product, various year

Figure 3 – Prescriptions only a small part of average household expenditure

While obviously it will vary household by household, according to ABS data average consumers only spend $5.83 per week of their household budget on prescription medicines. This compares with $6.16 a week on milk, $11.34 a week on cigarettes, $12.17 on mobile phones, $30.50 on fast food and takeaway, $31.97 a week on meals in restaurants and clubs, and $36.66 a week on petrol.

Again, while consumers may be facing cost of living pressures, prescription medicines are not the reason for this. In any event, just as the increase in household spending on mobile phones reflects adoption of new technologies, so too the growth in household spending on medicines reflects the fact that there are more medicines to treat more diseases available today than there were previously.

Figure 4 avoids the problems of Medicare Australia (as outlined under figure 1) by utilising the data from the Department of Health and Ageing to measure growth in total government spending on the PBS on an accrual basis, after adjusting for inflation . For example, while PBS expenditure grew by 3.6% in nominal terms in 2011-12, once adjusted for inflation this figure drops to 2.4%, following a similar growth rate in 2010-11 of 2.1%. Once revenue received by the Government back from manufacturers is included in the growth rate, the 2011-12 real growth rate is actually 2.0% compared with 1.6% for 2010-11. This data adjusted for revenue paid back to the Government is only available from 2008-09 onwards.

Despite the growth in PBS expenditure, as a share of the nation’s spending it remains constant. The PBS currently accounts for 0.62% of Australia’s gross domestic product, and has broadly remained in that range for the last decade. This compares with the most recent forecasts of the 2010 Intergenerational Report which projected the PBS to reach 0.7% by 2014-15. To reach this target, the PBS would have to grow by significantly more than GDP over the next few years.

Source: Source: PBS expenditure-DoHA Annual Reports, Department of Health and Ageing, Various Years. GDP-Australian Bureau of Statistics, catalogue 5206.0 – Australian National Accounts: National Income, Expenditure and Product, various years

Figure 1 shows the large drop in the average government cost of a PBS prescription in the June 2012 data, the first month of data to show the impact of the 1 April 2012 price reductions. This reduction in average cost shows that the PBS reforms are working and the Government is on track to save $1.9 billion over the forward estimates, keeping PBS expenditure well under control.

Figure 2 – Recent PBS data

Growth in government expenditure on the PBS in the 12 months to 30 June 2012 was 6.4% (Figure 2), before any adjustment for inflation. Despite a highly unusual spike in the official data at the end of the financial year (see Figure 5) this was similar to the growth recorded in the previous financial year and was well below the historical rates of growth in the previous three decades (see Figure 3). The trend of declining expenditure growth is likely to continue, as the largest single set of price reductions in the history of the PBS took effect on 1 April 2012 and the 2012-13 financial year data will include a full year of the impact of the reductions that showed in June 2012 data (Figure 1), as well as the impact of further reductions on 1 August and 1 December.

Figure 3 – PBS growth is declining decade on decade

The ten year average growth in PBS in the last decade (2000-2010) was one of the lowest since the 1980’s. The data for the first two years of the new decade has continued the trend, averaging 6.0%.

Figure 4 – PBS as a % of GDP remains stable

Over the last decade, PBS expenditure as a proportion of GDP has remained steady at between 0.6% and 0.65%. This percentage is now on a downward trend, as PBS expenditure has recently been increasing at a slower pace than nominal GDP.

Figure 5 – What happened to the June 2012 PBS data?

The volume of prescriptions recorded in the June 2012 PBS data was approximately 75% higher than the same month in 2011, and was 30% higher than any other month in history. Figure 5 shows the official volumes for the month of June over the last 20 years, highlighting the June 2012 aberration. Clearly this latest set of data could not have been a true reflection of actual dispensing activity.

Official PBS data is based on when the Department of Human Services (DHS, formerly Medicare Australia) completes the processing of each individual pharmacy claim. Detailed analysis of the official data reveals that DHS slowed down their average processing times in the nine months to April 2012. The backlog of pharmacy claims was rapidly cleared by DHS in May and June, to the extent that processing in June appears to be running ahead of the usual schedule. This volatility is likely to have resulted in 2011-12 financial year growth being overstated in the official figures.

Figure 1 – Recent PBS data shows no growth in real terms

Growth in government expenditure on the PBS in the 12 months to 31 March 2012 was just 0.8%. After adjusting for inflation, currently at 1.6%, this represents a decline of 0.8% in real terms. This is well below the Government’s own target of two per cent growth in real terms. The decline in expenditure is likely to continue, as the largest single set of price reductions in the history of the PBS took effect on 1 April 2012 and the impact of these reductions has not yet shown in the official figures. The PBS reforms are working – the Government is on track to save $1.9 billion dollars over the forward estimates and the current lack of (real) growth reinforces the industry’s long-held position that PBS is well under control.

Figure 2 – PBS growth is declining decade on decade

The ten year average growth in PBS in the last decade (2000-2010) was one of the lowest since the 1980’s. The Department of Health and Ageing Annual Report 2010-11 reported that in the financial year to 30 June 2011, PBS expenditure grew by 5.7%. The current growth rate (2.4%) for calendar year 2011 using Medicare Australia data reaffirms that the long term downward trend is continuing.

Figure 3 – PBS as a % of GDP remains stable

Over the last decade, PBS expenditure as a proportion of GDP has remained steady at between 0.6% and 0.65%. This percentage is now on a downward trend, as PBS expenditure is now decreasing (in real terms) while the economy continues to grow.

Figure 4 – PBS as a proportion of GDP – Actual vs Projected

Australia’s 2010 Intergenerational Report predicted that expenditure on the PBS will remain steady at 0.7% of GDP through to 2020. Already, actual expenditure in 2009-10 and 2010-11 was below the 0.7% of GDP forecasted in Intergenerational Report 2010.

Figure 1 – Recent PBS data shows no growth in real terms

Growth in government expenditure on the PBS in the year ended 31 Dec 2011 was 2.4%. After adjusting for inflation, this represents no growth in real terms. Given inflation over the same period was 3.1 %, it suggests that PBS expenditure actually fell in real terms. This growth rate is even below the Government’s own target of two per cent growth in real terms. The current growth is likely to continue as another major round of PBS Reform price reductions is due to take effect on 1 April 2012. The current lack of (real) growth re-iterates Industry’s position that PBS is well under control.

Figure 2 – PBS growth is declining decade on decade

The ten year average growth in PBS in the last decade (2000-2010) was one of the lowest since the 1980’s. The Department of Health and Ageing Annual Report 2010-11 reported that in the financial year to 30 June 2011, PBS expenditure grew by 5.7%. The current growth rate (2.4%) for calendar year 2011 using Medicare Australia data reaffirms that the long term downward trend is continuing.

Figure 3 – PBS as a % of GDP remains stable

Over the last decade, PBS expenditure as a proportion of GDP has remained steady at between 0.6% and 0.65%.

Figure 4: PBS as a proportion of GDP – Actual vs Projected

Australia’s 2010 Intergenerational Report predicted that expenditure on the PBS will remain steady at 0.7% of GDP through to 2020. Already, actual expenditure in 2009-10 and 2010-11 was below the 0.7% of GDP forecasted in Intergenerational Report 2010.

Growth in government expenditure on the PBS in the year ended 30 September 2011 was 5.7%. After adjusting for inflation, this represents growth of approximately 2% in real terms. This is a sustainable level of growth, and existing arrangements such as price disclosure will ensure expenditure remains well under control. Further price reductions, unrelated to PBS Reforms, take effect from 1 December 2011 and a major round of PBS Reform price reductions is due to take effect on 1 April 2012. The April reductions will average 23% across more than 200 drugs.

Figure 2 – PBS growth is declining decade on decade

The ten year average growth in PBS in the last decade (2000-2010) was one of the lowest since the 1980’s. The Department of Health and Ageing Annual Report 2010-11 reported that in the year to 30 September 2011, PBS expenditure grew by 5.7%. The current growth rate reaffirms that the long term downward trend is continuing.

Figure 3 – PBS as a % of GDP remains stable

Over the last decade, PBS expenditure as a proportion of GDP has remained steady at between 0.6% and 0.65%.

Figure 4: PBS as a proportion of GDP – Actual vs Projected

Australia’s 2010 Intergenerational Report predicted that expenditure on the PBS will remain steady at 0.7% of GDP through to 2020. Already, actual expenditure in 2009-10 and 2010-11 was below the 0.7% of GDP forecast in Intergenerational Report 2010.

Growth in government expenditure on the PBS in the year ended 30 June 2011 was 5.2%. After adjusting for inflation, this represents growth of less than 2% in real terms. This is a sustainable level of growth, and existing arrangements such as price disclosure will ensure expenditure remains well under control. The graph below does not include the impact of further price reductions that took effect from 1 August 2011.

Figure 2 – PBS growth is declining decade on decade

The ten year average growth in PBS in the last decade (2000-2010) was one of the lowest since the 1980’s. The publically available data for PBS expenditure shows that in the year to 30 June 2011, PBS grew by 5.2%. The current growth rate reaffirms that the long term downward trend is continuing.

Figure 3 – PBS as a % of GDP remains stable

Over the last decade, PBS expenditure as a proportion of GDP has remained steady at between 0.6% and 0.65%.

Figure 4: PBS as a proportion of Australian GDP- Actual vs. Projected

Australia’s 2010 Intergenerational Report shows that expenditure on the PBS will remain steady at 0.7% of GDP through to 2020. Already, the actual expenditure in 2009-10 was below the 0.7% of GDP forecasted in IGR for 2010.